Axis Slowing Growth - Q4 2011

The end of 2011 marked Axis's slowest growth quarter in more than 2 years plus the company offered pessimistic guidance for the short term. While Axis is still expanding notably, especially for its size, it is down from its incredible growth pattern of the recent past. In this note, we break down the financial details and examine Axis's future plans.

Let's start with a review of key datapoints in the Axis Year End Report (see Text report and Powerpoint):

• Axis finished 2011 with total revenue of 3578 SEK, equivalent to ~$530 Million USD, breaking the half billion mark. Their run rate at the Q4 2011 revenue level is ~$600 Milion USD.
• However, Q4 2011 revenue growth, year over year was only 22% in local currency terms. In the past two year, 30-45% growth was far more common.
• Axis warns of a slowdown in early 2012 claiming that it is seasonable and "in line with the trend for the same period for the same period of recent years." We find this to be suspect. One, if its seasonal, it should not impact year over year growth for any given quarter. Two, the growth in the 1st quarter of 2010 and 2011 was extremely strong. The most favorable interpretation we see of this statement is that quarter over quarter growth (between Q4 2011 and Q1 2012) will be weak. However, if Axis turns in a Q1 2012 that is weak year over year, this will be a bad sign.
• US growth was robust but Europe and Asia lagged: While EMEA and Asia both grew ~12%, the Americas, Axis' largest geographical segment, grew at 30%. Axis claimed that weak growth in EMEA was 'in line with the market' though only 12% growth for EMEA strikes us as low for IP surveillance.
• At the end of last year, Axis warned that the Thailand floods could "reduce sales by 10-15% over the next 3-4 months." However, in the Q4 2011 financial report that 'the impact on sales of the floods in Thailand was much lower than expected."

Industry watchers should look carefully at Axis's next quarterly report scheduled for April 2011. If Axis turns in weak year over year numbers, this would be a negative sign and show a trend.

However, we do not see any specific mistake Axis is making. Their new product development was strong throughout 2011 and no obvious self-inflicted errors are appearant.

Axis's Future Plans

One of the most interesting slides we found in Axis' presentation was about their future. While the slide is titled 'Industry Future', we see this as much more about Axis's future positioning:

The slide, in 3 major blocks, nicely summarizes Axis's development and positioning priorities:

• Image Usability vs Pure Pixels: We see this as one of the most interesting industry battles over the next few years as vendors fight over whether more pixels or better image 'usability' at lower pixel counts is best for customers. Our test results show that image 'usability' is more important for most users than a fixation on tens of megapixels. Furthermore, if this is Axis priority number #1, expect Axis to spend heavily on 'edu-marketing' this point.
• On board storage vs centralized storage: While centralized storage is certainly not going away, Axis clearly sees more intelligence and more resposibility for cameras as a key driver. Axis has been improving its edge storage capabilities and with growing 3rd party VMS support, we do expect it to become a more significant mainstream factor in the next few years.
• Cloud computing: The way we read the chart, cloud computing is the lowest priority and most long term of the three elements.

Interesting to note, video analytics is left out of Axis's big 3 bullets for the industry future.

This noted, we think the foundation of image usability and on board storage are two solid pillars for future mid term growth.